Drought could wreak havoc on grain forecasts

MattAndrejczak

SAN FRANCISCO (MarketWatch) — Just ahead of the springtime corn and soybean planting season in the United States, the country still shows strains from last year’s drought, its worst since the 1950s.

Goverment forecasters sound upbeat. They are calling for crop yields to rebound and for lower grain prices. Then again, it all depends on how weather conditions shake out over the coming months. Of course, commodities traders and agribusiness companies will be watching closely. Read: Summer drought may clobber the Midwest.

In making his forecast recently, here’s what Joseph Glauber, chief economist of the U.S. Agriculture Department, had to say:

“Listening to the forecast for 2013, one may have a sense of déjà vu, for the forecast is similar to the last year’s forecast for record corn and soybean crops made at last year’s outlook forum. Yet, instead of a record corn crop, we saw record high corn prices. Instead of herd rebuilding, there was further liquidation as livestock margins tightened. So while the outlook for 2013 remains bright, there are many uncertainties.”

Here’s what investors in commodities may have to look forward to:

— Matt Andrejczak

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China has developed a huge appetite for U.S. agricultural goods over the past decade. In 2013, the USDA projects China will edge out Canada for the second straight year as the top destination for U.S. agricultural exports. Exports to China are projected at $22 billion, down 6% from last year’s record of $23.4 billion. Soybeans and cotton dominate, making up two-thirds of this year’s projected total.

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Brazil will likely overtake the U.S. as the world’s No. 1 corn exporter this year, boosted by a bumper crop, reduced at-home use and more capacity to ship the grain. U.S. corn exports are forecast to drop 38% in 2013 to 24 million tons — the lowest volume level since early 1970s. This, the USDA says, reflects the magnitude of the current drought.

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Worldwide corn supplies are very tight, plumbing their lowest level since 1973. Global ending stocks are pegged at 50 days, down from 69 days during the 2008-2009 period.

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For 2013, corn acres planted is projected at 96.5 million acres, down slightly from 2012’s 75-year high. Soybean acreage is forecast at 77.5 million acres; if realized, that would match 2009’s record-high level.

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Since the Renewable Fuel Standard was created in 2005, corn used for ethanol in the U.S. grew by over 680 million bushels a year. It topped 5 billion bushels in both 2011 and 2012. However, elevated corn prices have hammered ethanol production margins and corn used for ethanol is expected to slow over the coming years. Why? U.S. gasoline consumption has been declining since 2008 and cars are more fuel efficient.

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Grocery food prices remain elevated. Retail food prices are anticipated to rise 3% to 4% this year as last summer’s drought works it way into supermarket aisles. Meat and dairy products are projected to see the biggest price increases. The U.S. cattle herd is at its lowest level since 1952 as grazing fields in northern Texas, Oklahoma and Kansas are parched. During 2012, supermarket prices went up 2.5%, following a 4.8% gain in 2011.

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Life has never been better down on the farm. Net cash income totaled $135.6 billion last year, the highest since 1973 on an inflation adjusted basis. For 2013, net cash income is seen declining 9% to $123.5 billion; costs for feed, equipment-rentals and labor are seen increasing. However, the farm debt-to-asset ratio is forecast at 10.2%. That would be the lowest level since the government began calculating the measure in 1960.

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